First-time buyers may also be hoping that a housing market crash is on the way so that they can snap up cheaper property with a lower deposit but even if the UK does go into a recession, that might not be the outcome.
Here’s what’s happened in the UK so far
Since April 2022, there was a 54% jump in gas and electricity prices and price caps previously set have been increased. If people have less money, spending on other things that help the economy is likely to slow down or halt.
The UK economy slumped 0.6% in June.
GDP (gross domestic product) is expected to fall to zero by 2023 - that’s the rate of the market value of all the goods and services produced in the UK. Less growth equates to a reduced income for the UK.
When this happens over two consecutive quarters (six months) it’s generally accepted that a country has gone into a recession.
The Bank of England has not technically predicted a recession. However, it does predict a downturn towards the end of 2022, with a contraction of almost 1% between October and December.
Are there plans to stop the recession in the UK?
Boris Johnson will not make "major fiscal interventions" before leaving office.
Potential replacement Liz Truss plans an emergency budget to lower taxes and to review the independent BoE's inflation-fighting mandate.
However, Rishi Sunak said tax cuts financed with more borrowing would force the BoE to increase interest rates even more.
Will interest rates in the UK increase further?
Most likely, yes. During August 2022, The Bank of England said that it would hike interest rates by 0.5% to a staggering 1.75%. That’s the highest that interest rates have reached since January 2009.
If inflation continues to soar, businesses in the UK could raise prices to keep making a profit and workers could demand wage increases to keep up with increasing prices.
As of August 2022, the UK has experienced a spike in industrial action as workers including train drivers, postal workers, teachers and nurses that are each facing the cost of living crisis strike and protest to negotiate better wages.
If this continues to happen and businesses also increase their prices, the OBR (Office for Budget Responsibility) has said that UK interest rates could rise to 3.5%.
Why are rising interest rates bad?
The BoE interest rate is the rate that mortgage providers and banks are charged to borrow money from the central bank, so that people and businesses can borrow from them. Therefore, when they’re charged more, that additional cost is likely to be passed on to borrowers seeking mortgages or other credit.
Consequently, people taking out a new loan in 2022/23 will soon be quoted a higher interest rate as a result of the BoE’s interest rate rise. Current homeowners with variable interest rates will also see a rise in their mortgage repayments.
How could a recession affect first-time buyers?
Rightmove has calculated that, with the 0.5% rate hike, a first-time buyer with a £224,943 home on a 10% deposit mortgage on a two-year fix would see monthly mortgage payments increase to an average of 40% of their annual salary.
Prior to today, Rightmove said the average monthly mortgage payment for a first-time buyer household was £976. This had already increased by 20% since January 2022 when it was just £813.
Given the rate rise, this will now increase to an average of £1,030, taking it from 38% to 40% of the average gross salary - a level not seen since 2012.
Don’t be fooled in thinking that it’s always been this expensive to own a home. The average asking price of a first-time buyer property is £224,943 as of 2022.
That means a 10% deposit on an average first-time buyer home is now a staggering £22,494, which is 57% higher than it was ten years ago (£14,316). Of course, if you’re living in the south of the UK, house prices are typically higher and consequently the average deposit for a first-time buyer is much higher too.
Deposit amounts for first-time buyers by region in 2022
The regional data for England that was collected for the UK House Price Index and published in March 2022 indicates that:
Region | Average price in March 2022 | 10% deposit (typically required for a first-time buyer) |
East Midlands | £240,329 | £24,032 |
East of England | £343,900 | £34,390 |
London | £523,666 | £52,366 |
North East | £154,913 | £15,491 |
North West | £205,121 | £20,512 |
South East | £384,996 | £38,499 |
South West | £313,834 | £31,384 |
West Midlands | £240,528 | £24,052 |
Yorkshire | £199,607 | £19,960 |
What does a recession mean for people that already have a mortgage?
Just under a third of households have a mortgage, according to the English Housing Survey.
Of those, three-quarters have a fixed mortgage. The rest - about two million people - will see their monthly repayments rise an eye watering £600 annually, according to Trade association UK Finance.
That means that people have less disposable income to spend at a time when household finances may already be stretched thin.
Those with a fixed-rate can relax for now but with most mortgage agreements offering a fixed-rate period between 1-2 years, with 5-10 years at the very most, many homeowners will likely be on the lookout for a cheaper rate that they can lock in during this financially turbulent period.
Don’t pay more for your mortgage by rolling onto the standard variable rate
A mortgage lender’s standard variable rate (SVR) is the highest rate a lender will charge. Rolling onto it from a fixed-rate deal is one of the most expensive ways you can repay your mortgage.
Fixed-rate deals aren’t what they used to be but a fixed-rate is usually always cheaper than a standard variable rate. The average two-year fixed mortgage rate as of August 2022 is 3.95% whereas in August 2020, it was just 2.08%, with many lenders providing fixed-rate deals with rates below 1%.
While interest rates are higher than they’ve been during the previous couple of years, homeowners could still benefit from switching their mortgage deal.
When the promotional period ends on a mortgage agreement, lenders begin to charge their customers based on their standard variable rate. This rate can be set at a level that the lender chooses.
Although it’s not directly linked to the base rate set by the BoE, usually, when the base rate increases, so do lender’s SVRs. That’s because the price for borrowing from the central bank has increased and that additional cost is passed onto borrowers like you.
People often continually switch their mortgage agreement over the years, so they avoid falling onto the SVR and instead, hop between different fixed-rate deals. While the price of remortgaging needs to be considered, sometimes the savings made from jumping between deals can outweigh remortgaging costs like arrangement fees or early-repayment fees.
Your options if your fixed-rate is about to end
When a fixed rate period end for your mortgage, you have three options:
Do nothing – your agreement moves to a variable interest rate with your current lender and you pay more per month for your mortgage
Ask for another fixed rate from your current lender. You might get approved for another fixed-rate deal, or, your current lender could decline and you continue to pay more.
Remortgage with a different lender. An alternative bank or mortgage provider might have a cheaper fixed-rate deal.
The choice is yours. Applying for a new mortgage is a big financial decision that shouldn't be taken lightly as ultimately, the new terms in your contract will affect how much you repay and how long you’ll be making those repayments.
How can I find a good interest rate for my mortgage in 2022?
Don’t apply for a mortgage without checking your eligibility first. If you get declined, it’ll remain on your credit report for up to six years.
Browse comparison sites online for a general view of what deals are out there but keep in mind that some lenders won’t appear on sites like that and either deal directly with borrowers or an intermediary, like a broker.
Using a comparison site might not always give you an accurate quote either as the initial quote provided might not take your specific circumstances into account. That can result in you looking at inaccurate quotes and wasting your time.
Do ask a broker to check your eligibility for you - without damaging your credit score.
A mortgage broker has access to a digital catalogue of UK lenders and they can pull up the ones you’re eligible to apply for in minutes, filtering out the irrelevant options.
Our brokers at The Mortgage Hut will happily show you the banks and lenders that are more likely to approve you based on information provided to them by you. Whatever you tell your broker is confidential and they’ll listen to what you need from a mortgage without judgement.
If you’ve got bad credit, a fluctuating income or income from more than one job, they’re not going to frown and give you a hard time. That’s not their job and they’re there to help you find the most affordable route for a remortgage or mortgage based on your situation. You’d be surprised at how common issues like CCJs are, with 1 in 13 adults (4.1 million people) having an outstanding County Court Judgment (CCJ) debt.
Avoid scanning comparison sites that don’t show all of the lender rates and get the information you need fast, from someone who’s qualified to calculate the cheapest option overall.
What will happen to property prices in 2022?
If you’re a first-time buyer, you might be wishing for a market crash so that you can swoop in and buy your first home at a lower price. While that could happen, some experts are predicting a slower fall in house prices rather than a sudden burst.
It’s true that further rate rises would make borrowing more expensive, therefore mortgages would be more expensive.
There’s also a decrease in disposable income to consider. Bills are higher and wages have been outpaced by soaring inflation, so that could prevent many from borrowing and buying.
That could slow down demand and cause property prices to drop
Usually, though not always, house prices rise during periods of economic growth and decrease in periods of decline.
To try and offset the effects of rate rises, the BoE removed the requirement for borrowers to prove that they can meet their mortgage repayments in the event that rates would go up by 3% on the lender’s standard variable rate. This change that came into play on August the 1st 2022, could make it easier for some people to get approved for a mortgage, therefore affecting the drop in demand for property.
There’s also a lack of property stock, with many people still seeking to buy their own or rent, and that could continue to put an upward pressure on house prices.
According to a survey conducted by the Royal Institution of Chartered Surveyors (RICS), in the lettings market, tenant demand continues to rise, with 36% of property professionals reporting an increase.
That’s good news for buy-to-let landlords seeking profitable investment opportunities, as usually, higher demand results in higher rent. Those in a position to buy in the current climate could therefore help to push demand for property and consequently slow down any property price drop.
What do you think?
What’s your take on the current interest rate hike? Do you predict that an increase in the cost of living and borrowing from the banks will ultimately cause a property price crash or do you think demand for housing simply won’t allow that to happen?
We’d love to know your thoughts and whether you’re still hoping to get a mortgage or remortgage this year.
Let us know via Facebook or message us directly if you have a question about a current or future mortgage and we’ll get back to you quickly with the answer you need.
